First Employment Incentive
encourages the creation of new employments and first employment
Dear clients and friends:
Last December 31, the presidential decree which expose some Income Tax Law regulations, released the “First Employment Incentive” which encourage the creation of new employments and first employment, and gives a benefit to those employers who hire workers for first employment and new creation jobs, which involves an additional deduction for income tax purposes for the taxpayer on the annual tax calculation as well as the advanced payments.
In no case this incentive should exceed the income tax amount due or the amount determined before applying such additional deduction. This program is effective for three years from the next day to its publication.
The additional deduction will be determined as follows:
I. The base salary multiplied by the worked days on a month or a year for every first employment worker will be reduced from the amount that resulted by multiplying the prior amount by the current income tax rate (30%).
II. The result obtained from the item above will be divided by the Income Tax current rates.
III. The 40% of the amount above will be applied on the annual income tax and advance payments, without exceeding the due income tax amount, or the amount determined before applying such additional deduction.
IV. The employer that does not apply the additional deduction on the annual calculation or advance payments will lose the right to do it in the following years up to the amount not applied.
Calculation example
Base Salary 478.56
(X) Number of worked days 31
(=) Base Salary of the Period 14,835.36
(X) Current Income Tax Rate 30%
(=) Result 4,450.60
Base Salary of the Period 14,835.36
(-) Result 4,450.60
(=) Result (Fracc. I) 10,384.76
(/)Current Income Tax Rate 30%
(=) Result (Fracc. II) 34,615.86
(X) Percent (Fracc. III) 40%
(=) Maximum amount of additional deduction 3,846.34
(X) Percent of allowed deduction 100%
(=)Maximum amount of the additional deduction 13,846.34
The additional deduction should not be considered on the profit-sharing calculation.
The additional deduction amount will only apply for those workers who receive eight times the minimum current wage from its geographical area.
Article 231 of Income tax Law defines some concepts for this tax incentive, such as:
Employer
Employee
First employment worker
New creation job
Existent job
Base Salary
The new creation job should be permanent for a minimum period of 36 months from its creation, term that the first employment worker should engage for a period of 18 months. After this period, the new creation job will not have the tax benefits (Art. 232)
On the profit coefficient calculation for advanced payments, established on article 14 of the Income Tax Law, should not be considered the additional deduction for the immediate preceding year (Art. 233).
Employer requirements to qualify for the additional deduction are as follow:
Labor relations should be governed by Article 123, paragraph A on the Mexican Constitution.
Create new jobs and recruit top level employees.
Enroll the First Employment worker to the Social Security Institute. (IMSS)
To determine and pay the Social Security quotas triggered by the first employment worker and the rest of the employees.
Do not owe prior tax credits.
The employer should notify before the Tax Administration Service that this tax benefit is elected. Also, the employer should submit in a monthly basis before the Tax Administration Service general information of his own and the employee, as well as the amount of the additional deduction. (Art. 236)
The employer should maintain the new creation job for a minimum period of 36 months from its creation, term that the first employment worker should occupy for a period of 18 months. After this period, the new creation jobs will not have the tax benefits (Art. 232)
To comply with the corresponding social security obligations (Art. 234)
The employer won’t lose the benefit if the contract of the first employment worker is terminated in the terms of article 47 of the Federal Labor Law as long as this is replaced by another first employment worker in the same new creation job. (Art. 235 LISR)
The employers that do not comply with the requirements aforementioned will lose the right for that deduction in the following months. (Art. 237)
Regardless of the penalties applied to the employers that do not comply with the established requirements, they will have to pay the corresponding amount of Income Tax unduly applied on the annual tax and advanced payments calculations, plus the corresponding update and surcharges.
The maximum amount for the additional deduction for 2011 will be 100%, 75% for 2012 and 50% for 2013.
(Art. Third Transitory)
The employer should submit a monthly information report every 17th for the recruitment of first employment workers corresponding to the prior month (Art. Fourth Transitory)
Should you have any additional comments or doubts on the content of this subject or any other tax matter please do not hesitate to contact us.
Contacts:
Mauricio Monroy Rojas
Office and Tax Partner
Tel. 664 972 9072 Ext.106
mauricio.monroy@monroycp.com
Guillermo Gómez Viramontes
Tax Partner
Tel. 664 972 9072 Ext.104
guillermo.gomez@monroycp.com